[ 20 September 2018 ]
Britain's private equity industry is the largest outside the US. What keeps these cutting-edge capitalists here?
A private equity titan
The UK is consistently the largest market in Europe for raising private equity funds, and the second largest in the world, after the US.
Origins – post-war reconstruction
Before hedge funds, buyouts and vintage wine funds, there was venture capital. Venture capital emerged simultaneously in the UK and the US (not that you’d know from Wikipedia) in the mid-1940s, as government-led initiatives to rebuild a shattered economy (the UK) and encourage entrepreneurialism among demobbed servicemen (the US).
Grandfather of European private equity
The UK’s venture capital vehicle for financing growing companies, eventually named 3i, was created in 1945 and effectively set the template for European private equity. At its peak in the early 1980s, it had an office in every largish town across the UK, from Aberdeen to Southampton. It then expanded across Europe, before retreating ignominiously in the noughties, but not before introducing a generation of continental European financiers to alternative financing.
The English Limited Partnership
In the 1980s, the emerging private equity industry was in need of a clear legal framework to operate under. A small band of London-based lawyers effectively created the modern limited partnership, paving the way for its use across Europe and effectively starting a new legal industry in the process.
The rise of the leverage buyout
As the venture capital model began to be used on ever larger businesses, the UK became Europe's largest private equity market in terms of amount invested, and beaten only by the economically lop-sided Luxembourg when measured relative to GDP. Leverage buyouts, which combines private equity with large amounts of debt, is politically controversial. What is not controversial is that the UK’s dominance of such techniques.
Alternatives – better in a crisis
According to a study by Stanford University, private equity owned companies in the UK invested more than listed companies during and after the financial crisis, and therefore recovered faster.
CVC – global heavyweight
Most of the really big investors are from the US, but London-based CVC is in the top 5, most well known for its ten-year ownership of Formula One and its recent approach to the rugby union premiership.
A fistful of private equity deals
Pret a Manger – when private equity firm Bridgepoint bought the coffee chain in 2008 it was on the verge of bankruptcy. It now has more than 500 outlets, including a foothold in France and the US. And when Bridgepoint sold earlier this year, all its 12,000 staff enjoyed £1,000 upside.
Tyrells – sometimes it takes more than one private equity firm to build a business, as has been the case with this crisp maker. The first lot bought out a potato farmer. The latest sold to a US corporate for £300m.
Poundland – built with private equity money.
Pizza Hut – saved from being a relic of the 1980s by private equity.
The AA : not a bad deal in terms of money back for investors, but an attempt to de-unionise the business resulted in a media firestorm.
Care Homes : From Four Seasons Healthcare to Southern Cross, a foray of (mainly US) private equity firms into UK care homes sector was a disaster .
Will Brexit harm the UK’s historical dominance of alternative assets? Not according to the industry association chief Tim Hames of the BVCA, who recently wrote to members that doom-mongers badly need to lie down in a dark room for a while. “This is not Armageddon. It is not Apocalypse Now. It is not even the Wizard of Oz.”
In an echo of 3i, in the wake of the financial crisis, a group of UK banks created the Business Growth Fund to fill a funding gap among growing businesses. It is now the most active investor in the UK.
Despite having a leading private equity industry, UK savers and pensioners do not reap much of the benefit. The major investors in UK private equity funds, and therefore their largest beneficiaries, are Canadian public servants, Californian teachers and firemen, Dutch pensioners, large US endowments, uber rich Swiss families and oil rich countries with sovereign wealth funds. Britain’s pension fund consultants have a lot to answer for.